Bank of America Tepid About Prospects for Core Profit Growth

Bank of America Corp. raised almost all the same questions as its fellow megabanks did last week and got no closer to resolving them.

B of A, like JPMorgan Chase and Citigroup, managed a profit, though on lower revenues and stagnant lending while credit quality improved. Its executives spoke more Friday about trimming the company's waistline than adding heft to its core businesses.

The reason for the lack of answers may indeed be … a lack of answers.

"The results from the larger banks are confirming our view that the U.S. economy is continuing to deflate," said Christopher Whalen, managing director at Lord, Whalen LLC's Institutional Risk Analytics. "The U.S. economy is finding a new run rate without the availability of excessive credit. Get used to it. For those of you who still believe in 'normalized earnings,' this is it."

Brian Moynihan, B of A's chief executive, discussed in detail efforts to minimize risk such as scalebacks in several loan books and the sale of several "noncore" assets.

A "principle that we've been focused on is narrowing the focus of our franchise," while still assessing the long-term impact of financial reform legislation and opportunities to cut costs, he told analysts on a conference call. "This is going to be in my mind a one-, two-, three-year type of work. It's not an overnight thing."

Executives had no similar prescriptive checklist for restoring loan growth, and attributed B of A's issues to a continued lack of demand from wary borrowers.

Charles Noski, on his first call since becoming chief financial officer, warned there could be another profit decline this quarter. "It will be the dynamic of how fast credit improves and expenses are kept under control versus the drop in revenue," he said.

Bank of America's loan portfolio shrank 2.5% from the first quarter and was relatively unchanged from a year earlier, at $967.1 billion. Moynihan isolated middle-market commercial clients as a segment that had "done a great job getting delevered and in very good shape" financially.

"They're ready to go," he said, if uncertainty in the U.S. and Europe dissipates.

There are more obstacles to growth, too, as B of A adjusts to a new regulatory environment. It estimated that annual revenue could be reduced by up to $4.3 billion from changes to interchange fees, credit cards and overdraft fees. Moynihan also said the company will likely take a goodwill impairment charge of $7 billion to $10 billion this quarter to reflect certain revenue hits. As JPMorgan Chase executives were a day earlier, B of A executives were reluctant to say how much of a hit would come from the sweeping reform bill.

The scaling back complicated results in the second quarter, too. B of A reported more than $1.1 billion in net pretax gains from selling minority stakes it held in Brazilian and Mexican banks, along with domestic asset management and private-equity businesses. Moynihan also announced Friday that the $2.36 trillion-asset Charlotte company is looking to sell Balboa Insurance, which it inherited with Countrywide Financial Corp.

Second-quarter net income fell 1.9% from the first quarter and 3.1% from a year earlier, to $3.12 billion. Revenue fell 8.8% from the first quarter and 11% from a year earlier, to $29.45 billion.

Mortgages remain a tough business, with Moynihan calling it a "tale of two cities" where originations are solid but defaults and modifications continue at a heightened pace. "We're still a few quarters away" from improved credit quality in a business line that posted a $1.5 billion loss in the quarter. "We're devoting a ton of effort and expense to working through defaults, short sales and modifications, and we're attempting to help every customer we can," he said. "In spite of all that hard work, we'll continue to see elevated foreclosures, short sales and other liquidations for the next several quarters."

Overall credit quality improved. The loan-loss provision fell 17.3% from the first quarter and 39.4% from a year earlier, to $8.11 billion. Nonperforming assets fell 0.6% from the first quarter but rose 15.2% from a year earlier, to $35.7 billion.

Jason Goldberg, an analyst at Barclays Capital, said the company's provision was $1.45 billion lower than net chargeoffs, creating a reserve release that lifted earnings per share by 9 cents. Jeff Harte, an analyst at Sandler O'Neill & Partners LP, called credit quality the company's "silver lining" as nonperforming loans fell sequentially for the first time in "multiple quarters."

Every other business line finished in the black, though results for the most part were down from a quarter earlier. The investment bank earned 75% less than it did in the first quarter or a year earlier, because of what the company called a "widespread market slowdown in the sales and trading businesses." Still, Moynihan used Friday's call to emphasize continuing efforts to remove risk from the investment bank, pointing to reduced positions in trading assets and collateralized debt obligations. He said traders also did a good job "getting out of the way of the Euro crisis and sovereign debt crisis" by proactively adjusting trading positions.

B of A has also reduced exposure to unsecured lending by 20% in recent quarters with plans to "effectively run to zero over the next few years," Moynihan said. B of A has also backed off of unfavorable home equity lines and "large floaters," a term for big commercial real estate deals.

Moynihan voiced support for two high-profile endeavors at B of A: its minority stake in China Construction Bank and its stake in BlackRock Inc. "CCB is a strategic asset for us. We have a strategic relationship that's broadening as we speak," he said.